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Equity Perspectives

How Lord Abbett equity and fixed-income analysts share their knowledge, insight, and expertise on industries, companies, finances, and strategies to serve investors in all kinds of markets.

Silos are for farms, not investment research. At Lord Abbett, fixed-income and equity analysts routinely attend each other’s management meetings, the same conferences, and compare notes on industry trends and company fundamental outlooks. In some cases, a fixed-income analyst has had a deeper perspective than his or her equity counterpart, particularly if the company had publicly traded debt for years and only recently decided to go public in the equity market. In other cases, an equity analyst has been more plugged into industry trends and management strategies, and more adept at predicting earnings surprises, avoiding the largest negative-surprise stocks, assessing when markets overreact, or finding opportunities outside his or her [portfolio’s/fund’s] benchmark.

These analysts, however, may not always agree with each other—the latest mergers and acquisitions (M&A) boom, for instance, has triggered divergent viewpoints on the impact of such transactions on the companies involved. While a fixed-income analyst might worry about additional debt used to finance a takeover, an equity analyst might be excited about the enhanced growth prospects of the combined company.

Even so, contrarian views, also known as out-of-consensus “variant perceptions,” are always welcome—and their conversations are likely to result in greater insights and conviction on the relative attractiveness and valuation of individual investments.

A cross-discipline approach has figured prominently in the career of Lord Abbett’s credit research head, Gregory Parker. After 21 years of covering industrial companies as an equity analyst and seven years as an equity director of research, Parker made the switch to fixed income, to become Director of Credit Research in 2012.

His counterpart on the equity side is David Linsen, Lord Abbett Partner & Director of Equity Research, who was named to that position two months after the Parker announcement. After covering consumer stocks as a research analyst, Linsen spent four-plus years as portfolio manager for Lord Abbett’s mid-cap growth and growth equity strategies.

Both Parker and Linsen are Chartered Financial Analysts (CFA) who have weathered all kinds of market volatility. Their appointments three years ago marked a much greater commitment to centralized research and laid the groundwork for cross-asset class synergies supported by a total of 45 analysts (see Table 1) who seek to maximize their investment team’s upside in good markets and to limit their downside in bad markets.   

“For my analysts, having a peer who covers the same industry and companies on the equity side to share information with has been very valuable,” said Parker. “For David, it’s the same thing: equity analysts always want to know what their fixed-income counterparts are thinking about. It’s a good combination, and this expert-to-expert information sharing should really add tremendous value to the overall research process at the firm.”

 

Table 1. Lord Abbett Global Research at a Glance
U.S. and international equity analysts and fixed-income analysts, by sector


Source: Lord Abbett.  As of 9/24/15
For analysts that cover multiple sectors, the sector with the greatest coverage was chosen.

 

When the Chips Are Down
When it came to a heavily leveraged semiconductor company, technology analysts Shilpi Mukherjee and Eric Ghernati had complementary perspectives on the upside potential during a period when many investors appeared to be negative on the firm.

As a stock analyst, Ghernati was more focused on the company’s product cycle and how that was going to affect revenues and earnings going forward. While he knew there were balance-sheet issues, he believed the product cycle eventually would gain traction and so maintained his above-consensus earnings estimates, notwithstanding negative signals from the bond market. 

As a fixed-income analyst, Mukherjee was focused on the company’s balance-sheet liquidity issues. She had become more comfortable with the company’s plans for a debt restructuring, and viewed the bonds as attractively valued and recommended purchase for our funds.

“Shilpi shed more light on the balance-sheet improvement parts of the story, and Eric illuminated what he was seeing in terms of sales channel activity and how the company’s new products were doing,” Parker recalled. “Shilpi’s insights on the balance sheet made Eric more confident in his positive investment view of the company and helped to support his upgrade of the company’s stock, and Eric’s more positive sales channel views gave Shilpi more confidence in owning the debt.” 

“If we believed what the market was suggesting about that company’s earnings outlook, we should have been bearish on the stock,” said Ghernati.  “But the company went on to report break-out results, confirming the bull thesis.”

The bottom line is that input from both analysts gave their respective portfolio managers more comfort in investing in the stock and bonds of that company.  

“Adding value for clients of multiple investment strategies—that’s the kind of collaboration that we are driving for,” said Parker.

Fluid Conversations
When Parker hires new analysts, one of the first things he does is walk them one flight up, to the twelfth floor, to meet their equity counterparts.

“You are covering the same areas… [so] make sure you are talking frequently and learning from each other,” Parker usually says.

Case in point: Iskra Simidchieva, a CFA Parker hired in 2013 to cover pharmaceuticals, medical equipment, and biotechnology, readily exchanges views with veteran equity analysts Lavina Talukdar (pharma and biotech) and Devesh Karandikar (medical equipment), to cite one of a number of examples.

“With all the M&A in just the pharma and biotech sectors, collaboration with fixed-income analysts has been huge, especially in hostile takeovers or proxy battles,” said Talukdar. “Acquisitions in the equity world are welcome, given the low-rate environment. Companies are being rewarded for putting their capital to work and augmenting their growth profiles with acquisitions. This is not always the way Iskra in fixed income will see it, as many companies are raising debt to do it, inherently adding to the risk of servicing their debt.”

Research synergies also have been evident in Lord Abbett’s coverage of consumer staples and consumer discretionary companies. Just ask Emanuela Scura, a fixed-income analyst, with 14 years of experience, who covers food and beverages (among other consumer industries) and certainly appreciates insights from Lord Abbett Partner John McMillin, an equity analyst with 36 years of experience.

To say that McMillin covers a broad universe would be an understatement. Under the rubric of consumer staples, a sector that produces goods that are always in demand, he covers food retailers, producers and distributors; agriculture; tobacco; beverages; and household and personal care. Some of the companies in McMillin's consumer staples universe are growth leaders. Some are value opportunities. Some are dividend plays.

While McMillin typically favors "best-in-class" companies with dominant market shares and the potential to perform well in most economic environments, he believes some companies in his universe will adapt to current trends more quickly, or be pressured by activist investors to make complementary acquisitions or spin-off underperforming assets. “John’s long-term perspective on industries, brands, management, and strategies (strengths and weaknesses) has been a tremendous resource,” said Scura.

When, for example, a big food company was rocked by an accounting scandal, McMillin helped Scura look beyond the headlines and rumors and understand the enduring value of the company’s main underlying brands. That short conversation increased her confidence in the company’s term loans, which were selling at a substantial discount at the time.

Another example of such collaboration involved a cereal maker that issued bonds after it was spun off by a more diversified food manufacturer. “McMillin's past experience with the CEO and his appetite for acquisitions helped me to place the appropriate weights on alternative scenarios, emphasizing in particular the likelihood of future deals," said Scura. “And that deeper insight helped me expand my analysis of the company’s long-term direction as well as the investment opportunities.”

Global Thinking
Greater collaboration also factors into Lord Abbett’s move toward a global sector research model that takes a more holistic approach to industry and competitor analysis, especially given the growing interdependence of market leaders. Whereas American companies still lead sectors such as technology, banking, household products, and apparel, international companies have the largest market shares in auto manufacturing, auto parts, construction materials, and restaurants, among others, according to Bloomberg. And, of course, many of those companies rely on parts made (and finished products sold) outside their home countries. 

All of which explains why Ghernati will check in with Lord Abbett Research Analyst Naimish Shah for perspective on how the global proliferation of smart phones affect international stocks in his universe. After all, Asia is a big driver of demand, given its rapidly growing population, increasing market penetration, and the rise of the middle class. And some of the Asian companies Shah covers are such large, vertically integrated manufacturers, that they buy from, and compete with, companies that Ghernati covers.

Economies of scale also factor into the collaboration between McMillin and Lord Abbett research analyst Janet King, who covers consumer companies for the international equities team. In analyzing the titanic battle for dominance in the global beer industry, they reached an agreement on which brewer was most likely to approach a competitor this year about a potential takeover to expand its reach—months before it announced such an overture.

“This company has a history of being very acquisitive. Whenever it gets below their optimal leverage of two times, the experienced management team looks to one of their core competencies, mergers and acquisitions, to create value” said King. “Its latest announced target would help it expand market share. But the Federal Trade Commission would probably force it to sell off a significant joint venture, and one of the U.S. companies John covers has right of first refusal.”

Of course, a potential takeover of this magnitude typically is complicated and time consuming. But even if it doesn’t happen, the reported target still appears more attractive on a relative multiple basis (e.g., price-to-earnings,1  EV/EBITDA2) than almost every global brewer, while having the most attractive long term fundamentals, said King.

“Collaboration like this happens on a regular basis,” said Linsen. “And as Lord Abbett’s global research continues to expand, so should the potential to serve investors better.”

 

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